Common Myths About Bankruptcy

General Myths

#1 Myth: Bankruptcy relief is no longer available under the new bankruptcy law

Truth: Almost all of the relief formerly available through bankruptcy survives in today’s bankruptcy code. It is a little more involved (with the “means test”), and therefore many older attorneys (ones that consider themselves “experienced”) tend to use this extra process as an excuse to charge higher rates. The “means test” only changed the method in which debtors qualify for the different types of bankruptcy (specifically Chapter 7) and added a few types of debts that are no longer dischargeable. But it doesn’t prevent people from filing, and in most situations, people are still able to get the same relief now as before the law changed.

#2 Myth: Only deadbeats / losers file for bankruptcy

Truth: Most people that file for bankruptcy (90%) do so only after a life-changing experience (such as a divorce, the loss of a job, or a serious illness) and after struggling to pay their bills for months, they keep falling further behind. Bankruptcy is a safety mechanism to prevent people from being buried by debts they can never repay, even with years of hard work. Bad times don’t make a person bad, and bankruptcy is an option to help good people get past a bad time. By filing bankruptcy, you can get a fresh start after a life-changing experience, without being held back by debt that was accumulated by a situation outside of your control.

#3 Myth: Everyone will know I’ve filed for bankruptcy

Truth: All bankruptcy filings are technically public records. But most likely, nobody will be looking unless you’re a prominent person or a major corporation, and the filing is picked up by the media. There is a very good chance that the only people that will know about your filing are your creditors (and they will be notified by mail, not by any mass publication like a newspaper).

#4 Myth: Bankruptcy costs our society too much

Truth: The idea of bankruptcy was so important to our society that it was one of the few things that was actually agreed upon and included in the U.S. Constitution. Without bankruptcy, people could be consumed with debt that would be impossible to repay during their lifetime, and thus would become unproductive members of society (why work hard, if at all, if you will never be able to keep a single cent you earn?). Also, without having the safety net of bankruptcy, many people would not dare to take risks by starting their own businesses. Plus, credit card companies are still very profitable, despite the small percentage of loans discharged in bankruptcy.

#5 Myth: You can only file for bankruptcy once

Truth: There is no actual restriction upon filing for bankruptcy, but this must be distinguished from actually having your debts discharged (there are some times when people or business file bankruptcy just for the “automatic stay,” regardless of the fact that the debt might not be discharged).

You can file for bankruptcy under Chapter 7 once every eight years. If you want to file for Chapter 13, you will not receive a discharge within two years of a previous Chapter 13 discharge and within four years if your debts were discharged from a Chapter 7, 11 or 12 Bankruptcy.

#6 Myth: Filing bankruptcy could cost you your job

Truth: Technically, a current employer can check an employee’s or potential employee’s credit report, but only with the employee’s written permission. The bankruptcy code prohibits discrimination against an individual “solely” because they are or have been a debtor. This means that the employer must show that there was another reason unrelated to the bankruptcy for the action (firing or not hiring).

#7 Myth: You can’t file bankruptcy if you have a job

Truth: If you have no job, then you have no money to pay your debts, and you are likely a strong candidate for bankruptcy if you have a large amount of debt. The recent changes to the bankruptcy code, specifically the “means test,” place a restriction on amount of “disposable income” someone can have when filing for Chapter 7 Bankruptcy (liquidation). The purpose is to prevent people that have money left over after paying necessary expenses (as determined by the government) from getting rid of all debt when they could make a repayment plan with a Chapter 13 Bankruptcy filing.

#8 Myth: Creditors can still harass you if you file for bankruptcy

Truth: Once a bankruptcy petition is filed, the Federal Bankruptcy Court will issue an automatic order that protects you and all of your property. This occurs the instant the court clerk stamps the petition as filed. Creditors are not allowed to contact you for any reason, which includes calling, billing you, suing you, or even foreclosing on your property if they already have a legal judgment. If the creditors disobey or disregard this Federal Court Order (especially by calling and harassing you), there are remedies available through the Federal Bankruptcy laws.

#9 Myth: Chapter 13 plans require repayment in full of debt

Truth: The general rule is that a Chapter 13 Bankruptcy must provide the creditors with more than they would have received under a Chapter 7 filing (but often, creditors will get nothing under a Chapter 7). Payment plans are worked out with your bankruptcy attorney and the creditors and will vary based upon the ability to file under Chapter 7, disposable income, the value of non-exempt assets, and many other factors. A payment plan cannot last more than 5 years (60 months) and less than 3 years (36 months). The main benefit of a Chapter 13 filing is that you may be able to keep more of your assets than if you filed under Chapter 7, while getting your debts discharged after the plan has been fully carried out and the creditors getting more than they would have otherwise.

Myths About the Bankruptcy Process

#1 Myth: You can choose whether to include all or only certain debt in a bankruptcy filing, and if a debt is listed in bankruptcy it cannot be repaid (even if you want to)

Truth: You must list all of the debts that you owe and the property that you own. You cannot discriminate between creditors, even if you want to keep paying them. Even if you are not in default on certain loans, you must still list them as creditors if you owe them anything. While you are no longer obligated to repay them, you always have that opportunity (and sometimes it can be a good idea depending on the circumstances).

Failure to accurately and honestly list all of your debts and assets can lead to the bankruptcy petition being dismissed, and this is not something you want.

#2 Myth: It’s really hard to file for bankruptcy

Truth: It’s really not hard, but it is recommended to have an attorney represent you, since there is a lot of paperwork. Proper planning with an attorney can help protect the value of some non-exempt assets.

#3 Myth: I can max out all my credit cards, file for bankruptcy, and never pay for the things I bought

Truth: It is considered fraud to take out loans with the intent to never repay them. Fraud occurs at the time the loan or purchase on credit was made. As long as you had the intent to pay back the money at that time, there is no fraud.

But fraud is a serious (and potentially criminal) problem as well as one of main reasons the Bankruptcy Court can dismiss a petition without granting a discharge.

#4 Myth: There is a minimum amount of debt required to file bankruptcy

Truth: While there is no minimum amount required, it does not make sense to file unless the debt is more than you can reasonably repay. Often, solutions can be reached with creditors, especially when there are relatively few of them and the amounts are not too high. But each situation is different, and while it might not make sense for a doctor with $50,000 in debt to file for bankruptcy, it might make sense for someone that has been unemployed for the past year.

Myths About What Debts Are Dischargeable In Bankruptcy

#1 Myth: All debts can be wiped out in a bankruptcy filing

Truth: Certain types of debts cannot be erased (these are called Non-Dischargeable Debts). They include, but are not limited to, child support and alimony, student loans, most taxes, debts resulting from personal injuries while drunk driving, governmental fines and penalties, and debts incurred as the result of fraud.

#2 Myth: Medical bills can’t be discharged in bankruptcy

Truth: This is absolutely false. Most medical bills are unsecured debt, and almost all unsecured contract debt (like credit cards, personal loans, and medical bills) remain dischargeable in bankruptcy. Even if a medical bill was secured, it could be discharged, but it would mean selling the property that secured the bill.

#3 Myth: You can’t get rid of back taxes through bankruptcy

Truth: For the most part, this is true, but you can get rid of income taxes that are more than three years old. The problem is that there are there are several qualifications that have to be met in order for the taxes to be wiped out, but having a portion wiped out is better than none at all. In addition, sales taxes must be repaid and cannot be wiped out by filing bankruptcy.

Myths About What Things You Do and Don’t Get To Keep

#1 Myth: You will lose everything you own by filing for bankruptcy

Truth: Well over 95% of bankruptcy cases filed by individuals are “no asset” cases in which the debtor keeps everything he/she owns. That’s because exemptions provide for assets that the debtor can keep, and some assets, like pensions, are beyond the reach of bankruptcy trustees and creditors. The bankruptcy code uses exemption laws set by each state. In order to qualify to use a state’s exemption laws, you must have lived in that state for a minimum amount of time before filing. Therefore, if you just moved to California, you won’t be able to use the exemption laws of California.

Certain assets may have security interests (mortgages, liens, etc.) that cannot be removed by filing bankruptcy, but if the equity you have in that asset is exempt and you are not in default to the creditor with the security interest, you can keep that asset. The prime example is a home loan that is secured by a mortgage on the home. If you have $40,000 of equity in the home and are up to date on your loan payments, other creditors cannot force you to sell your home to get the $40,000 of equity since it is exempt under California law. But, if you were in default on the home loan, the lender could foreclose on the mortgage. Also, if you had $120,000 of equity in the home, then you would be forced to sell your home under a Chapter 7 filing, with the proceeds going first to the home lender to pay off the loan, then you would get the full amount of your exemption (in California, that’s $50,000 for a single person and $75,000 for married couple). The rest would go to pay off other creditors.

#2 Myth: I can keep my car and house without having to pay off the loans when included in the bankruptcy filing

Truth: As discussed in the myth above, these types of loans are usually made only with a security interest (mortgage, lien, etc.) on the items that is purchased with the loan. Therefore, if you default on the loan, the lender can foreclose. But when you file bankruptcy, all legal actions against you and your property are automatically stopped (including foreclosure). It is possible (though not a common occurrence) that by filing bankruptcy and stopping foreclosure, you might be able “buy” enough time to get your finances in order enough to pay off the loan and hold onto the property.

Myths About the Impact of Bankruptcy On Your Credit

#1 Myth: I’ll never get credit again

Truth: While the bankruptcy will appear on your credit history, you will start establishing credit from day your discharge is granted. When bankruptcy wipes out debt, this will, in turn, help your credit score. Making timely payments on the property that you choose to keep also shows a record of good credit. You will be able to get credit as soon as your bankruptcy is discharged–sometimes sooner.

However, if you’re planning to buy a house or a car, you might want to do that before you file. Those loans will be tough to get, and the higher interest rate on such a large purchase would make a significant impact on your payments. Also, if you have a credit card with a zero balance on the day you file for bankruptcy, you don’t have to list it as a creditor since you don’t owe any money on it. That means you might be able to keep that card even after the bankruptcy.

#2 Myth: People who file bankruptcy can’t get credit for 10 years

Truth: While a Chapter 7 filing can remain on your credit history for 10 years, you will get credit card offers and be extended credit right after the discharge of your bankruptcy. But, these lenders will charge much higher rates, using your recent bankruptcy as the reason. When it comes to purchasing a home, lenders will look at a consumer’s most recent credit history more than the past and will also consider income and employment stability. It will be difficult to purchase a home immediately after filing bankruptcy, but it will be possible as time passes and as you rebuild your credit. People in Chapter 13 can borrow money during the case, and the bankruptcy will not only disappear from your credit history quicker, it will also not be treated as such a negative mark on your credit.

#3 Myth: Filing for bankruptcy will improve your my credit rating because all those debts will be gone

Truth: While your pre-petition debts are erased (unless they are non-dischargeable), a Chapter 7 filing is a negative mark that will remain on your credit history for up to 10 years. But, given the country’s recent economic problems, the stigma of a bankruptcy filing is much less than it was just a few years ago.

Myths Regarding Married Couples and Bankruptcy

#1 Myth: If you’re married, both spouses have to file for bankruptcy together

Truth: In most cases, it makes sense for a husband and wife to file together. But in some instances, one spouse might not want to file, or it might not make sense for both to file.

Often, the debt a married couple will have is debt that they are both responsible for. If it is these debts that you wish to erase, then both spouses should file together. But if one spouse has a significant amount of debt in his/her name alone (and the other cannot be held responsible for it), then an individual filing may be appropriate. If only one spouse files, it will take much more work to carefully determine what property is subject to reach of the Trustee and what assets are beyond the reach of the Bankruptcy Court.

#2 Myth: A spouse can proceed with filing for joint bankruptcy without getting the other’s permission.

Truth: Both spouses must give permission for the filing of a joint bankruptcy. Since the decision to file will impact each spouse individually, each must consent to the filing.

#3 Myth: Filing bankruptcy causes more family trouble and divorce

Truth: Bankruptcy eliminates debt, which eliminates financial stress. Filing bankruptcy is often the solution to the problem, not an additional problem. Although making the decision to file bankruptcy might be difficult one, the relief provided will lift a huge weight off of you, and the absence of financial stress can give your relationship space to grow strong again.